Forex Reduces 2009 [2]

In the last post i gave you 2 important factors and details about forex reducing in 2009 . I am continuing that post now .

Forex Reduces 2009:

3. UPlay Acquisition

If the UPlay acquisition had been for a material amount, we would certainly be concerned about it’s potential for success or failure. After all, no company we know of has ever made a penny selling hand-held GPS technology to golfers. The subscription model just has not worked. With UPlay, the model is going to be a single purchase price, then a $10 fee per course to download the relevant information. We remain skeptical.
It was suggested to us that the technology could be adapted to the creation of other non-golf products. While we don’t expect to see Callaway competing with Garmin or Tom Tom any time soon, we are curious to see what some of these other products may be. But we have the CEO on record; “Trust me, we will make money with GPS”. To that we say “Trust us, we will keep on asking”.

4. Compression to Tangible Book Value

The shares are now selling at a minimal premium to tangible book value, and a pretty significant discount to stated book value. Our judgment continues to be that while price targets are irrelevant at the moment, downside risk is significantly limited. With the forex headwind currently impacting EPS, we can only say with great assurance that the forex relationships are going to change again, sometimes for the better, sometimes for the worse. Frankly, as it relates to changes in foreign currencies, there is no ‘normalized earnings’ per se. Thus assigning benefit to forex gains or deducting points for forex losses is a waste of time.
Callaway is running their business about as well as can be expected in this environment. Most industry participants were impressed with their Q4 top line results. We think, with a global footprint and significant financial resources that ELY will ride this out better than most. We also believe that analysts trying to micromanage the rating on ELY will be very late to the party when the turn comes. So we will stay here, reiterate our buy rating, and see just what the spring has in store for us. It’s risky, but risk is our business. No price target is necessary from these levels.

5. Initiating 2010 EPS Estimate

We can make a case why consumer confidence should actually start to pick up in 2009, but we can’t make a case why it should pick up fast enough to help a calendar front-loaded industry such as the golf industry in time to help much in 2009.
The self fulfilling prophecy of industry participants forecasting weak sales is enough to keep open-to-buys low and inventory stocking modest. If thing pick up in 2009, the chase will be on, but who can get there?
We think 2010 could be quite different though. We judge that any recovery of consumer sentiment will be felt in the 8-9 million core golf consumers first and more vigorously. Every participant we talked to agreed with the concept of demand building as consumers defer purchases, and the more they defer, the greater the pent up demand will build.
Thus when sentiment turns up, business is likely to have an explosive ramp off the bottom initially, resulting in a very strong first year recovery. Therefore, our estimate reflects what that recovery could look like if indeed we come off the bottom in 2010 or before. Our initial estimate for 2010 is at $1.24 per share. Our revenue estimate is for revenues to recover to $1.125 billion. While our confidence in our 2010 estimate is not high, our confidence that our 2009 estimate is likely too low is pretty strong.
Since this is a single point estimate based as much off an economic call we are not going to attempt to base any price target off of this estimate. Still, we want it out there and on the record.